Updated from 2:13 p.m. EDT with new stock prices

Financial stocks trailed the sinking broad market a day after Federal Reserve Chairman Ben Bernanke said the ongoing housing market turmoil will likely be a "significant drag" on the economy through early next year.

Evidence of the crunch, meanwhile, continued surfacing in fresh third-quarter results. Mortgage-security writedowns and mushrooming credit losses ate into Wells Fargo's ( WFC) quarterly profit -- which, at 68 cents a share, was 2 cents shy of Thomson Financial's consensus estimate despite gaining 6.2% over last year.

Shares of the San Francisco bank fell $1.41, or 3.92%, to $34.54, to weigh on both the NYSE Financial Sector Index and the KBW Bank Index. The trackers were recently plunging close to 2% apiece.

Also dampening both indices was Cleveland's KeyCorp ( KEY), which dropped 5.90% to $30.44 on a wide miss. Third-quarter continuing-operations income plunged by 23% from last year to 57 cents a share, or $224 million (less the effect of an accounting change). The Street was looking for 71 cents a share.

New York broker Jefferies ( JEF) and Alabama bank Regions Financial ( RF) each reported diminishing earnings that fell short of expectations. Shares shed 5.28% and 2.06%, respectively. Minneapolis-based U.S. Bancorp ( USB) posted a penny per-share gain for a penny beat, but total earnings slipped slightly. Its stock gave up 0.49% to $32.35.

Citigroup ( C) was still suffering a day after unveiling a tumbling third-quarter profit , with shares lately off 3.14% to $44.79, and troubled mortgage lender Thornburg Mortgage ( TMA) slid 3.55% ahead of today's scheduled postclose earnings release.

Out of earnings, CNBC reported that Merrill Lynch ( MER) CFO Jeff Edwards will "probably" be ousted from that position within the next few months for making upbeat comments on Merrill's financial health during a July conference call, less than three months before its announcement of enormous third-quarter writedowns .

CNBC cited "senior executives" at the firm. Merrill denied the report. Shares were down 2.46% to $71.79.

Elsewhere in the red, Lehman Brothers ( LEH) slipped 2.66% after mortgage-lending unit Aurora Loan Services disclosed it had axed 160 employees in response to housing-market woes, and Navigators Group ( NAVG) lost 2.12% to $56.86 on a Friedman Billings downgrade to market perform from outperform.

But Boston bank State Street ( STT) climbed 8.34% after third-quarter earnings totaled $1.15 a share, excluding one-time merger costs -- 21 cents better than the average analyst call, and 38.6% higher than last year. Revenue rocketed 47.9% year over year to a better-than-expected $2.24 billion. Shares gained $5.75 to $74.68.

SCPIE ( SKP) was one of the sector's biggest price gainers after The Doctors Company agreed to buy it for $28 a share in cash, or roughly $281 million. Shares of the Los Angeles insurer surged 23.09% to $27.19 in light trading.

Finally, Bear Stearns ( BSC) gained ground on news that China's Citic Bank is in talks to take a stake in the New York firm, whose pair of troubled subprime mortgage-focused hedge funds made the broker one of the hardest hit by the credit crisis. Shares tacked on $2.36, or 1.96%, to $123.05.

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